Should the IRS pay us interest on our federal withholding?

Question

Every month I have to pay $300 dollars to the IRS for federal withholding. That's about $3600 a year. If I took that same money and put it in the bank I would aquire several hundred dollars in interest by April 15 of the next year when it is actually due to the IRS. When I deduct my withholdings from my taxes I think I should be also able to deduct interest for them using my money. Is this already possible? If not do you think it should be? If my taxes are late I have to pay interest.

Answer 1

Your goal with your withholding should be to break even, you don't owe the IRS and they don't owe you because you overpaid your taxes. the taxes withheld from your paycheck are based on what You put on your W4.

Use your last paycheck stub and the withholding calculator from the IRS to find out how much you should be having withheld to avoid having a balance owed or a refund next year and make the adjustment to your W4 after completeing the calculator.

http://www.irs.gov/efile/article/0,,id=118986,00.html

Answer 2

The tax system is supposed to be pay as you go, so taxes are due to the IRS when you earn the money, not on April 15. April 15 is just the filing deadline, if you waited till then to pay your taxes you would have to pay penalties.
If your withholding is more than your tax due, you can always reduce your witholding

Answer 3

I was just reading about tax withholding. This is fairly new in the US. It used to be that you would pay your entire tax bill on April 15. However, that resulted in people having to pay large tax bills so they implemented this paycheck withholding system. It was very controversial. Ostensibly, the reason for the withholding is so that the taxpayer doesn't get hit with a huge tax bill on April 15. The side effect is that the government is holding your money for up to 12 to 15 months.

However, you do have options. I believe you can instruct your employer to withhold $0 from each paycheck. That might result in a penalty on April 15 if your tax bill is too high. There are rules about that sort of thing. What you could do is switch to quarterly tax estimates which reduces (but does not eliminate) the time the government is holding your money. You should also try to estimate it as close as possible such that your tax bill on April 15 is zero or you owe some money. If the amount is zero or you owe money, you are really just pre-paying your taxes. It wasn't your money, per se. It was the tax you owed the government from the time you earned it. However, if you are getting a refund, that really was your money that you lent (interest-free) to the government.

Answer 4

As for changing your Employee's Withholding Allowance Certificate (Form W-4) to reflect "Exemption from Withholding," a taxpayer must meet two criteria:
1) He had a right to refund of all of his tax withholding and had no tax liability in the prior year, and
2) He expects a refund of all of his tax withholding and expects no tax liability in the current year.

If the above conditions are not met, yes, a taxpayer may adjust his exemptions to a higher number, according to proper calculations. As has been suggested by another user, here, adjusting the exemption number to produce break-even is the ideal.

I applaud you for your wisdom, here! It is incredible how many taxpayers think, "Wow! XYZ Tax Service got me a 4-digit refund, just like last year! I recommend them to all of my friends and family!" What really happened, behind the scenes, is that that taxpayer, and all of his friends and family, who followed that bad advice, lent a great deal of money to the tax authorities... interest free!

There are many better uses for your money, yes, indeed!

Phil
http://www.phillipfostercpa.com/money.html

Answer 5

The goal of the IRS is to have you withholding as close to breaking even on your tax account throughout the entire earning period - which is your tax year.

The IRS does pay interest on overpayment of Federal withholding which is delayed by the IRS/Treasury, after the Taxpayer files and has reasonable expectation of his/her refund.

Go to www.irs.gov, individual, withholding calculator.

Try to get as close (I said -0-, ) breaking even and use your own money for your own financial adventures....[no large refund/no large tax debt]

Answer 6

Actually, income taxes are due when the income is earned, NOT on April 15th!

If you have too much withheld and are getting a refund, you have only yourself to blame for the interest free loan to the government. Get your withholdings adjusted so that you're not making that loan to the government and invest it somewhere so that it will work for YOU, not THEM.

You cannot hold back on the payment of taxes through the year and settle in full on April 15th. If you do, you'll be assessed penalties and interest for underpayment of taxes.

Answer 7

You owe the money through the year, not just at the end - that's the way the law is written. So no, you don't have interest coming for the year.

If you get a refund at the end, then you overpaid, so maybe you could make your argument on that part - but since YOU are the one who determined what would be taken out, YOU are the one responsible, so the argument wouldn't get far.

Answer 8

Our tax structure is such that the withholding is for the "pay as you go plan" which means that each month or whatever the anticipated tax for that pay period is paid. The logistical nightmare of trying to figure out how much interest to pay on what would probably sink the entire tax system. It is an interesting thought but entirely unworkable with current techology.

Answer 9

Great idea, but it will never work with our current tax structure.

The only way you could do what you are thinking of would be to change your W-4 to exempt and put whatever is normally held out each pay period into a saving account and then settle with the I.R.S. every April 15th.

Answer 10

Penis?